Archive for the ‘Interest Rates’ Category
Are the Clintons the Real Housing-Crash Villains?
Let’s revisit this piece of financial history, before Hillary rewrites it.
We are going to reveal the grand secret to getting rich by investing. It’s a simple formula that has worked for Warren Buffett, Carl Icahn, and all the great investment gurus over the years. Ready?
Buy low, sell high.
It turns out that Donald Trump has been very, very good at buying low and selling high, which helps account for his amazing business success.
But now Hillary Clinton seems to think it’s a crime. Campaigning in California last week she wailed that Trump “actually said he was hoping for the crash that caused hard-working families in California and across America to lose their homes, all because he thought he could take advantage of it to make some money for himself.”
So she’s assailing Trump for being a good businessman — something she would know almost nothing about because she’s never actually run a business (though she did miraculously turn $1,000 into $1 million in the cattle-futures market).
Hillary’s new TV ads say Trump predicted the real-estate crash in 2006 (good call) and then bought real estate at low prices when the housing crash that few others foresaw arrived in 2008. Many builders went out of business during the crash, but Trump read the market perfectly.
What is so hypocritical about this Clinton attack is that it wasn’t Trump, but Hillary, her husband, and many of her biggest supporters who were the real culprits. Before Hillary is able to rewrite this history, let’s look at the many ways the Clintons and their cronies contributed to the housing implosion and Great Recession.
Both acts were revolutionary, the first agenda item on each president’s to-do list, no matter that after 1912, when President Woodrow Wilson was elected, a major economic slump punctuated the economy. The Federal Reserve bill, like Obamacare, was intensely partisan. Wilson’s liberal Democrats, who held both of Congress, wanted a completely government-controlled system for a central bank and currency, whereas Republicans favored mostly private regulation.
Democrats prevailed, jamming the measure through the Senate by a divided vote of 54 to 34 on Dec. 19, 1913. A conference committee approved it on Dec. 22, followed by a House vote of 298 to 60, with 76 not voting. The Senate passed the conference report on Dec. 23 by 43 to 25, with 27 not voting and one vacancy. Not a single Senate Democrat opposed the conference report, only two in the House, and signed it the same day. (more…)
Peter J. Wallison
American Enterprise Institute
The Case for Repealing Dodd-Frank
PETER J. WALLISON holds the Arthur F. Burns Chair in Financial Policy Studies at the American Enterprise Institute. Previously he practiced banking, corporate, and financial law at Gibson, Dunn & Crutcher in Washington, D.C., and in New York. He also served as White House Counsel in the Reagan Administration. A graduate of Harvard College, Mr. Wallison received his law degree from Harvard Law School and is a regular contributor to the Wall Street Journal, among many other publications. He is the editor, co-editor, author, or co-author of numerous books, including Ronald Reagan: The Power of Conviction and the Success of His Presidency and Bad History, Worse Policy: How a False Narrative about the Financial Crisis Led to the Dodd-Frank Act.
The following is adapted from a speech delivered at Hillsdale College on November 5, 2013, during a conference entitled “Dodd-Frank: A Law Like No Other,” co-sponsored by the Center for Constructive Alternatives and the Ludwig Von Mises Lecture Series.
The 2008 financial crisis was a major event, equivalent in its initial scope—if not its duration—to the Great Depression of the 1930s. At the time, many commentators said that we were witnessing a crisis of capitalism, proof that the free market system was inherently unstable. Government officials who participated in efforts to mitigate its effects claim that their actions prevented a complete meltdown of the world’s financial system, an idea that has found acceptance among academic and other observers, particularly the media. These views culminated in the enactment of the Dodd-Frank Act that is founded on the notion that the financial system is inherently unstable and must be controlled by government regulation.
We will never know, of course, what would have happened if these emergency actions had not been taken, but it is possible to gain an understanding of why they were considered necessary—that is, the causes of the crisis.
Why is it important at this point to examine the causes of the crisis? After all, it was five years ago, and Congress and financial regulators have acted, or are acting, to prevent a recurrence. Even if we can’t pinpoint the exact cause of the crisis, some will argue that the new regulations now being put in place under Dodd-Frank will make a repetition unlikely. Perhaps. But these new regulations have almost certainly slowed economic growth and the recovery from the post-crisis recession, and they will continue to do so in the future. If regulations this pervasive were really necessary to prevent a recurrence of the financial crisis, then we might be facing a legitimate trade-off in which we are obliged to sacrifice economic freedom and growth for the sake of financial stability. But if the crisis did not stem from a lack of regulation, we have needlessly restricted what most Americans want for themselves and their children.
It is not at all clear that what happened in 2008 was the result of insufficient regulation or an economic system that is inherently unstable. On the contrary, there is compelling evidence that the financial crisis was the result of the government’s own housing policies. These in turn, as we will see, were based on an idea—still popular on the political left—that underwriting standards in housing finance are discriminatory and unnecessary. In today’s vernacular, it’s called “opening the credit box.” These policies, as I will describe them, were what caused the insolvency of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and ultimately the financial crisis. They are driven ideologically by the left, but the political muscle in Washington is supplied by what we should call the Government Mortgage Complex—the realtors, the homebuilders, and the banks—for whom freely available government-backed mortgage money is a source of great profit.
The Federal Housing Administration, or FHA, established in 1934, was authorized to insure mortgages up to 100 percent, but it required a 20 percent down payment and operated with very few delinquencies for 25 years. However, in the serious recession of 1957, Congress loosened these standards to stimulate the growth of housing, moving down payments to three percent between 1957 and 1961. Predictably, this resulted in a boom in FHA insured mortgages and a bust in the late ’60s. The pattern keeps recurring, and no one seems to remember the earlier mistakes. We loosen mortgage standards, there’s a bubble, and then there’s a crash. Other than the taxpayers, who have to cover the government’s losses, most of the people who are hurt are those who bought in the bubble years, and found—when the bubble deflated—that they couldn’t afford their homes. (more…)
DECKER: 5 Questions with BB&T’s John Allison
‘It’s easier for government to control a few large institutions’
By Brett M. Decker– Brett M. Decker, former Editorial Page Editor for The Washington Times, was an editorial page writer and editor for the Wall Street Journal in Hong Kong, Senior Vice President of the Export-Import Bank, Senior Vice President of Pentagon Federal Credit Union, speechwriter to then-House Majority Whip (later Majority Leader) Tom DeLay and reporter and television producer for the legendary Robert
Friday, May 11, 2012
Decker: You told me you couldn’t create your company in today’s environment. That’s quite a startling statement about such a successful business. Why not?
Allison: BB&T grew through local decision-making and personalized service focused on small businesses and the middle market. The current regulatory environment not only imposes extraordinary cost on smaller financial institutions, it makes it difficult to treat each customer as a special individual. Personalized service is now considered by the regulators to be “disparate” treatment. Small-business lending is part science and part art. It is extraordinarily difficult to execute a personalized value proposition with bank examiners micromanaging every decision.
Decker: Banks are used as whipping boys to impute blame for the collapse of the housing market, but government played a central role in the mortgage crisis. Can you explain how Washington intervention manipulated the market with such disastrous results?
Allison: Government policy is the primary cause of the financial crisis. The Federal Reserve “printed” too much money in the early 2000s to avoid a mild recession, which led to a massive misinvestment. The misinvestment was focused in the housing market due to the affordable housing (subprime) lending policies imposed by Congress on the giant Government Sponsored Enterprises (Freddie Mac and Fannie Mae), which would never have existed in a free market. When Freddie and Fannie failed, they owed $5.5 trillion and had $2 trillion in subprime loans. Because Freddie/Fannie had such a dominate share of home-mortgage lending in the United States (75 percent), they drove down the lending standards for the whole industry. (more…)
The current debate about the debt vote is minor league compared to what will happen when the government literally cannot spend more than it is taking in. That time may be nearer than you think. It is true that the U.S. government can always “print” money to pay its bills, but at some point, printing more money becomes self-defeating because the resulting increase in the government bond interest rate and required interest payment will spiral out of control. At that point, the government will be forced to operate on a pay-as-you-go basis, as any individual or business is forced to do when they can no longer get credit. Several California cities are now in this situation.
The U.S. government now receives about $200 billion a month in revenue and spends about $320 billion a month. Any responsible business or individual faced with a situation where receipts are only 60 percent of expenditures would make changes before their credit was cut off or, at the very minimum, have a plan for which bills to pay first — but not the U.S. government.
It appears that President Obama is once again going to produce a budget that assumes very high levels of deficit spending can go on forever. It also appears that Senate Democrats will continue to not bother to pass a budget. Note that the purpose of a budget is to allocate scarce resources (your money) and to make sure that spending does not exceed the funds that are available. Senate Majority Leader Harry Reid is the ultimate spoiled child, accusing the taxpayers of engaging in child abuse by not giving him an unlimited allowance. (more…)
Published on The Weekly Standard (www.weeklystandard.com)
Money for Nothing
Who caused the financial collapse? Just about everyone.
Lewis E. LehrmanJanuary 14, 2013, Vol. 18, No. 17The Financial Crisis and the Free Market Cure – Why Pure Capitalism Is the World Economy’s Only Hope by John A. Allison, McGraw-Hill 320 pages, $28EXCERPT FROM THIS ARTICLE: As the head of a major American bank, Allison was witness to the decisions of government, Federal Reserve leaders, and banking CEOs that led to a huge speculative bubble and the collapse of the financial system, including Fannie Mae, Freddie Mac, virtually the entire cartel of big banks and brokers, and major companies. Allison guides us, with a gimlet eye, through taxpayer-subsidized bailouts of these wards of the state, focusing on a reckless, insolvent, privileged financial oligarchy—subsidized by a feckless Fed, a dilatory Treasury, and a politicized FDIC. The coercive power of the federal government, and the moral hazard of excessive regulation, is dissected and debunked.
To appreciate this landmark work it is necessary to know a bit about the author’s background.
John Allison is not only a banker-entrepreneur; he is also a recognized intellectual leader of American business. Moreover, Allison’s financial expertise is a product of his personal biography: In a mere two decades, he built BB&T (Branch Banking & Trust Co.), a comparatively small Southern bank of $4.5 billion in assets, into a $152-billion financial enterprise, making it one of America’s largest and most profitable banks. But unlike many overpaid, underperforming CEOs, Allison focused his leader-manager skills—at modest compensation—on behalf of his employees, customers, and shareholders. (more…)
We’ve Been ZIRPed
The perils of the zero interest rate policy.
EXCERPT FROM THIS ARTICLE: Savers are getting ripped off. Interest rates are near zero, yet the inflation rate as of October 2012 was 2.2 percent, which means real interest rates are negative 2 percent, so savings are being diluted by 2 percent a year. It’s a stealth, non-voted-on tax, maybe as much as $200-300 billion a year. This is not news. The Roman emperors debased their coins from 4.5 grams of pure silver to less than a tenth of a gram over a few centuries. Hardly anyone noticed until the Visigoths (or was it the Vandals?) showed up to sack Rome. The U.S. dollar has been diluted by 96 percent since the Federal Reserve was created 99 years ago. Modern vandals!
Father-son talks are always difficult, but it was time to teach my teenager about how things work. I dragged him to our local branch of Wells Fargo and opened a checking account with ATM card privileges and a savings account where he deposited his hard-earned umpiring cash. Having worked on Wall Street for 25 years, I stroked my chin and provided some sage advice: Checking accounts don’t pay interest, so keep your money in the savings account and just move it to checking when you need it. None other than Albert Einstein, I noted, said, “compound interest is the most powerful force in the universe.”
His first bank statement showed interest income of $0.01—and a series of $35 fees for insufficient funds, wiping out all his money. I got a “You’re a financial genius, Dad,” dripping with sarcasm.
My son got ZIRPed. Senior citizens living on fixed incomes are getting ZIRPed. We all are. Since December 2008, when Ben Bernanke’s Federal Reserve started buying mortgage backed securities in order to “solve” the financial crisis, we have all been subject to a zero interest rate policy.
Banks were (and still are) sitting on piles of underwater mortgages. They can’t sell them at depressed prices, else they trigger losses and writedowns to their leveraged balance sheets and maybe—yikes—go bankrupt. The stock market knows this, which is why Bank of America shows $20 in book value (assets minus liabilities) on their balance sheet, but the stock is selling for under $11. Citigroup’s book value is $64, and the stock is $37. Better that banks had been stripped of these mortgages back in 2009 via temporary nationalization or good bank/bad bank splits. But no one had the courage, so instead we are subject to ZIRP, at least through mid-2015.
The Fed’s concept was simple: With interest rates at zero, capital will flow to other financial assets with better returns. Like the stock market, which would allow banks to raise capital and deleverage their balance sheets so they could slowly but surely write down all those crappy mortgages. Or into real estate, which might raise prices and make those bank mortgages less underwater.
Conceptually, ZIRP has worked. The stock market is up 12 percent in 2012. Bank stocks like Bank of America’s have doubled off their lows. Real estate investment trusts, or REITs, are up 15 percent. Yet in the real world, ZIRP is a huge FAIL. GDP growth in 2012 will come in at an anemic 2 percent after a 1.7 percent tick up in 2011. ZIRP is not growing the economy. And no growth means no jobs. (more…)
- September 17, 2012
The Magnitude of the Mess We’re In
The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States.
By George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor – The authors are senior fellows at Stanford University’s Hoover Institution. They have served in various federal government policy positions in the Treasury Department, the Office of Management and Budget and the Council of Economic Advisers
Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don’t want, but need, to hear.
Where are we now?
The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens’ and institutions’ purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.
The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.
Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008. (more…)